A few years ago our credit department stopped doing a financial analysis on renewals under $250K and as a result we are recording gross revenue data on a lot of our loans as a 3 (or NA) because we don’t have financials to go off of. Needless to say, our performance in lending to small businesses with annual revenues of under $1MM is suffering. I’ve been going in circles trying to figure out a way to collect this data as accurately as possible without requiring financials with the thought that the data could be used during underwriting as an indirect review for red flags.

Has anyone else been going through this and have any advice to share?

No I haven't, sorry I'm not any help. I'd attempt to have a chat with management to make sure everyone knows the potential consequences.

Thanks RR Jen. Are the potential consequences you're referring to in regards to the impact this is having on our CRA performance?

Personally, I think your management has confused the appraisal guidance for loans under $250,000 with prudent commercial loan underwriting standards, regardless of the dollar amount of the loans in question. While a full blown credit analysis may not be necessary, at least a simple financial trend analysis would be prudent.

I wish that was the case here as it would give me a leg to stand on to collect financials... Instead, underwriting performs an abbreviated analysis for loans under $250,000 where overall exposure is also $500,000 or less that looks at LTV, credit score, and repayment and overdraft history for the last 12 months. Only when that review yields a negative outcome do we perform a financial analysis.

I've heard that more banks are moving toward this, but have yet to find any that can speak to how they've mitigated its impact on CRA performance as these loans are no doubt the ones primarily serving our small businesses. Any thoughts/feedback is appreciated!

I wouldn't have the weight to argue with the credit department on what is or is not required from their perspective, but I would clearly document your notice of the (even potential) impact of your CRA loan performance to management. We are new reporters, but so far the only loans that we are not "requiring" GAR for are CD secured loans.

Good luck!

What size bank is this? The exam procedures for small and ISB provide for use of a proxy such as loan size for revenue.

If an analysis of the distribution of loans among geographies of different
income levels would not be meaningful (e.g., very few geographies in the
assessment area(s)) or an analysis of lending to borrowers of different
income or revenues could not be performed (e.g., income data are not
collected for certain loans), consider possible proxies to use for analysis of
the institution’s distribution of credit. Possibilities include analyzing
geographic distribution by street address rather than geography (if data
are available and the analysis would be meaningful) or analyzing the
distribution by loan size as a proxy for income or revenue of the borrower.


This usually comes up on very small "small business loans" that are approved based on the owner's credit score; those are usually around the $25,000 mark, not $250,000. Some banks have run into real problems around this issue.

Hi Kathleen - we are a large bank so based on what you stated I'm thinking that route may not be a good avenue for us. I hope it lends others a hand though!

Do you see any issues with collecting revenue data for CRA (without requiring financials) if we use it as an indirect underwriting review for red flags?

My primary concern is if an examiner would view collection of the data as non-compliant. I say that because it would only be used as a secondary review for concerns, which an examiner could argue is not fulfilling the requirement (so to speak) that the gross revenues were considered to make the credit decision. I'm basing this off of the data collection guidelines which state, "Generally, an institution should rely on the revenues that it considered in making its credit decision when indicating whether a small business or small farm borrower had gross annual revenues of $1 million or less."

A secondary concern is simply that it feels sloppy to report data we request over phone where we're having borrowers estimate the gross annual revenues of all entities they have ownership in. Though, per the guidelines it would appear to be okay... "CRA regulations similarly do not require institutions to verify revenue amounts; thus, institutions may rely on the gross annual revenue amount provided by borrowers in the ordinary course of business."... so perhaps I'm over thinking it?

Any additional thoughts or input is appreciated!

Like Randy, I am surprised this gets by safety and soundness standards. That aside (!!! - says the former commercial lender, loan review and risk manager!!!), I think if the info was collected without an analysis you could report it.

Would credit be willing to say "sales and profits are steady" without a full analysis (and even perhaps just getting those numbers from the customer), so that you can get the data for CRA?

There was a post here a few years ago from a bank that was scrambling because they were being threatened with a needs to improve for CRA over this issue. I will go find that and link it here for you.

Here is the older thread.

https://www.bankersonline.com/forum/ubbt...ing#Post1765610

Hi Kathleen, thank you for your help and the thread! I feel the same way about safety and soundness but we've had no issues thus far (except my gross revenue headache!).

Credit is definitely willing to collect the prior calendar year's revenue and include it on the underwriting form but I suspect they'll balk at the idea of asking for more than that and say "what for?" since we can't go back in time and report the data. I'll probably put together a secondary analysis on our 2016 loans after combing through old data...

I hate to get too far into the weeds (but heck - I'm in compliance - I can't help it!) but should we have a process in place that addresses consistency across reporting years? What I mean is, if we use a persons wages in Year 1 to underwrite a new loan (GRC = 3), and we renew the note in Year 2, can we report a GRC of 1 or 2 of the business (because at this point we're now collecting it over the phone) if underwriting did not originally "rely" on the businesses revenues?

Would the solution for this not just be to collect "stated" revenues? For example, they may not utilize a review of financials in the credit decision process but we still want to get "credit" for it for CRA purposes so you could just request stated revenues in which the applicant indicated their gross annual revenues yet nothing is verified by financials. I don't see any issues with this, but will let others like Kathleen opine. I think in some of these examples we are not thinking from a credit perspective of a deposit secured small dollar loan. Some may have a policy where loans of that nature below a certain dollar threshold do not require financials. In that case would it not be a best practice to just request stated revenue figures from the applicant. Does anyone see anything wrong with utilizing stated revenues even if outside of this example?

Thanks for chiming in ComplianceRegs.

When asked, our CRA examiner stated that we could not collect revenue data just for CRA purposes, citing what the reg. does - that it needs to be the revenue data relied on in our credit decision. Therein lies my hesitancy to collect it without some sort of established credit review.

It's been frustrating as it seems counter to what CRA wants to know/accomplish if we're not permitted to collect GAR in all situations.

Keep going to the Q&A's... If you collect the revenue information, whether relied on for the credit decision or not, it is reportable.

§ll.42(a)(4)—4: When indicating the gross annual revenue of small business or small farm borrowers, do institutions rely on the gross annual revenue or the adjusted gross annual revenue of their borrowers?

A4. Institutions rely on the gross annual revenue, rather than the adjusted gross annual revenue, of their small business or small farm borrowers when indicating the revenue of small business or small farm borrowers. The purpose of this data collection is to enable examiners and the public to judge whether the institution is lending to small businesses and small farms or whether it is only making small loans to larger businesses and farms.

The regulation does not require institutions to request or consider revenue information when making a loan; however, if institutions do gather this information from their borrowers, the Agencies expect them to collect and rely upon the borrowers’ gross annual revenue for purposes of CRA. The CRA regulations similarly do not require institutions to verify revenue amounts; thus, institutions may rely on the gross annual revenue amount provided by borrowers in the ordinary course of business. If an institution does not collect gross annual revenue information for its small business and small farm borrowers, the institution should enter the code ‘‘revenues not known.’’ See Q&A §ll.42(a)(4)–2.